Isn't it funny how digitalisation has entered so much of our daily lives? Imagine if we could explain it to ourselves from twenty years ago.
I have written often about the rapid expansion of financial technology ('fintech') and the growing digitalisation of the fund research value chain - what I have termed the 'new fund order'. It has led to an increasing number of interesting conversations with digital start-ups.
Meanwhile, an increasing wave of broad studies have challenged the very foundation of our ability to select funds and pick winners. The battle lines have been drawn between active and passive fund management; with costs and smart beta as antagonists in the mix.
So far this year I have already, quietly, assessed over 60 fund managers. Most involved on-site visits, beauty parades, due diligence questionnaires and various analysis. It entails a lot of countless hours of work but to what end? There is nothing quite like getting up each morning, as a professional fund buyer, to read media that questions my very worth. Unless you manage a fund of fund, is there a way to help capture that ability as a fund buyer?
The fund rating and consulting landscape has changed in recent years, with established agencies exiting to be replaced by new firms, gradual proliferation and blurring of lines between agencies (like Morningstar), multi-managers (like Russells) and DC (defined contribution)a consultants (like Mercers).
I see a range of reliance among fund buyers, from those wholly dependent on rating advocacy, to agencies being gatekeepers and influencing platform buy lists, growing presence within fund databases and media, a support tool to validate a proprietary view, right through to being utterly ignored. Part of the issue is that advisers find it hard to ascertain the relative merit of rating agencies or understand their business models.
Meanwhile contemporary academic US studies (eg, Del Guercio, University of Oregon, 2012) indicate that help is needed for advisers.
Research titled Mutual Fund Performance and the Incentive to Generate Alpha noted "we find no evidence that actively managed funds underperform index funds. Instead the study indicated that actively managed funds sold through brokers faced a weaker incentive to generate alpha, and significantly underperform index funds."
In aggregate US financial advisers made poor fund pickers according to the study, which in turn has skewed the US-driven active-passive debate and likely exacerbated subsequent asset concentrations into ‘supertanker’ funds and passives. Were prevailing rating agencies and DC consultants part of the problem or the solution? I suspect both.
Some advisers and fund buyers will feel rightly aggrieved by these claims and therefore a huge opportunity exists to demonstrate economic value through fund selection. To achieve this means working with rather than against fintechs, towards which the wider roboadvice debate seems to be heading. Uploading analyst views onto a common platform would allow investors to track analyst performance. (Incidentally, a report published by Citigroup on 3 September, 2015 titled Rise of the Machines: Retail Revolution suggests roboadvice AUM could hit $5trn in the next decade)
There is onus too on rating agencies and DC consultants to ensure their ratings are as reliable on the day of the trade as they were on the day the rating first went live. I suggest they too could load their ratings onto a common platform.
Lastly, annual fund awards could be uploaded and similarly scrutinised. All data used should be time-stamped and ratings monitored on an ongoing basis, with performance shown since the rating was first applied.
New start-ups like Tel-Aviv based SharingAlpha.com show the way and should be applauded for their take on developments.
“Our vision is to offer the investment community a better way to select winning funds and at the same time to offer fund selectors the option of building their own proven long term track record. It's about time that funds will be ranked on the basis of parameters that have been proven to work and fund selectors will be judged on their ability to add value to investors," says co-founder Oren Kaplan.
The era of fintech fund ratings may be here.